Company collapses? We've only just begun, warn accountants

An insolvency firm has warned that company collapses could shoot up later this year, as HMRC begins to take a firmer line on payments and long-awaited spending cuts start to hurt public sector suppliers.

Begbies Traynor, which produces the Red Flag Alert, said that 140,000 companies experienced "Significant and Critical financial problems" in the fourth quarter. This was up 6 per cent on the previous quarter, but 14 per cent down on the same period in 2008.

It said this suggested "high levels of corporate distress", despite government efforts to stimulate the economy. It added that it was seeing business failures occur at "an earlier stage of deterioration" than in previous downturns.

More positive factors included a more lenient approach by creditors, particularly compared to the panic in the last quarter of 2008, and improved business confidence.

However, it warned that HMRC is still one of the main creditors in many insolvencies, and once the "time-to-pay" scheme ends, "there will be a significant rise in company failures – most probably from Q3 2010 onwards."

It added that companies with a big dependence on the public sector were "particularly vulnerable" after the election, when public spending cuts begin in earnest.

This will be further exacerbated by tax and interest rate rises, as well as increasing pressure on consumer spending.

According to executive chairman Rick Traynor, unemployment and corporate collapses have historically lagged behind "technical recessions" by one to two years.

So, he said, "there is every reason to suggest that the insolvency peaks of this recession remain some way off." ®